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Why Britain Is Headed for a ‘Soft’ Brexit

(Bloomberg) -- With less than nine months until Britain is due to leave the European Union, the U.K. government finally has a plan. It aims to keep the biggest benefit of being part of the EU -- the ability to freely trade goods with the other 27 members -- and minimize the damage to businesses and the economy of leaving the bloc. Though she would be loath to use the term, Prime Minister Theresa May is signaling that the U.K. wants a "soft" form of Brexit, where Britain forges a very close relationship with the EU and gives up on the idea of regaining control over many of the rules and regulations governing commerce. Still, winning the EU’s support won’t be easy.

1. How would this work?

At the heart of the plan is a new U.K.-EU "free trade area" where Britain agrees to stick to EU rules for industrial goods -- such as safety standards -- along with regulations covering agriculture and food. There will also be a newfangled system of interlinked customs regimes that will rely on new technologies that haven’t yet been developed. The U.K.’s goal is simple: Keep goods from food to car parts flowing across the English Channel by avoiding customs checks and tariffs.

2. Will businesses be happy with the plan?

The big names from Airbus SA to BMW AG that have warned about the fallout from a so-called hard Brexit in recent weeks might sleep a little easier. But the proposal on trade is limited to goods, which means selling services into the EU looks set to be complicated by Brexit. May’s plan acknowledges that the U.K.’s vast services sector, which accounts for about 80 percent of the economy, will suffer significant disruption. Banks in particular will lose their current open access to sell into the EU market.

3. Why separate goods and services?

It all comes back to one of the key promises of Brexit: giving the U.K. the ability to strike its own trade deals with fast-growing countries like India and China. Sticking to EU rules for goods means Britain’s hands will be tied when it comes to, say, importing chickens from the U.S. that have been washed in chlorine (a practice banned in the EU). But for services, the plan is for the U.K. to be able to diverge from the EU if it chooses, meaning it will be free to make its own deals in areas like banking or telecommunications. Still, trade deals covering services are something of a rarity.

4. Does the plan solve the problem of the Irish border?

Perhaps. Combining the customs arrangement with the alignment on rules means there’s theoretically no need to check any goods moving across the 310-mile (500 kilometer) border across the island of Ireland. Once Brexit takes effect, the boundary between the Republic of Ireland, which will remain part of the EU, and Northern Ireland, a region that’s part of the U.K., will become the EU’s frontier. The two sides have pledged to keep the border invisible. But since the EU doesn’t know when (if ever) the U.K.’s customs idea will take effect, it wants a backup plan that would bind Northern Ireland to Europe’s customs rules while mainland Britain breaks away.

5. Will the EU go for the plan?

Probably not. EU leaders like to repeat that they won’t stand for "cherry picking," or trying to benefit from the good bits of being in the bloc (like "frictionless" trade) without putting up with the obligations that the U.K. wants to shed (like the "free movement of people"). Irish Prime Minister Leo Varadkar has said that splitting up the treatment of goods and services in any Brexit deal could spell the end of the EU’s treasured single market. Still, May is giving up on some significant points, such as allowing some sort of continuing role for the European Court of Justice, the EU’s highest court. EU officials may view May’s plan as a starting point for negotiations, rather than rejecting it outright.

6. So what’s May’s game plan?

May is betting that she’s getting closer to a version of Brexit that the British Parliament will support, and seems ready to stand up to some of her more rebellious lawmakers who are lobbying for a more dramatic break. Ultimately, though, the details of the future trade relationship don’t need to be decided now. According to the timeline that the EU and U.K. signed up to, the two sides just need to agree on a framework for how it will work in order to avoid a crash divorce. Then Britain gets its two-year transition period, during which the real negotiations on an EU-U.K. trade deal will happen. This is just the start.